Years to repay student debt as a way of setting student contributions

In The Australian this morning, Melbourne University VC (and my former boss) Glyn Davis has an op-ed saying:

As the 2011 Lomax-Smith report made clear, there is no consistent principle guiding public and private contribution to university study. A law or economics student pays about 83 per cent of the cost of their education while students in other disciplines enjoy a much larger public subsidy. This is not fair.

I have no dispute that the current system of setting overall funding rates and student contributions is untidy. It is the accumulated result of ad hoc decisions going back 25 years. There has been no careful empirical work to ensure that either funding rates or student payments reflect clear funding principles.

That said, I do not believe that the current principles for setting student contributions are inherently ‘unfair’. When different student contributions for different courses replaced previously flat HECS rates in 1997, the stated rationale was the new fees would reflect a mix of private benefit and course costs.* The higher the private benefit, the higher the student charge, with some but not primary acknowledgement of course cost. If course cost is not the major factor in setting the fee, it is not clear that calculations based on course cost denominators tell us much. The implied denominator for a private benefits approach is future earnings or some other measure of private advantage.

The reason law and economics student pay most of their course costs is their high private benefits/low course costs combination. But the idea behind differential HECS was to get a more even outcome on a student costs/graduate private benefits calculation.

I think one interesting way to look at this is to calculate how many years it takes graduates in different disciplines to repay their HELP debt. Based on 2011 census data, we think it would take a median male graduate about 10 years to repay their HELP debt. The chart below shows that even though law students pay high fees, they are estimated to take less time than average to repay, because their salaries are higher than average. Business graduates are estimated to take 11 years, a little above average.

median years reapy

From an egalitarian perspective, something like this system means that graduates across the disciplines put in more similar work effort to repay their debts than a system in which their subsidies are a more consistent percentage of course costs. For example, if we had a 50:50 public/private funding system law graduates would get higher subsidies and take less time to repay, despite already being on the shorter side of the median. Science students would get lower subsidies and take more time to repay, despite already having an above-median repayment period. It was counter-intuitive outcomes like these that sunk the Lomax-Smith recommendation of a 60:40 public/private split.

From a public benefit subsidy perspective, the current system also has some merit. In this analysis, students make some calculation of private benefits (financial and non-financial) from a course and compare these with the costs (also financial and non-financial). If we want to encourage more people to take education generally or particular courses via subsidies we can alter private financial benefits to make them more attractive. But if private benefits are already high, we don’t need subsidies at all or to the same extent. This means that we can charge students in high private financial benefits courses more, regardless of cost.

To reiterate, this is not a defence of the detail of the current system. But there are good reasons not to be too worried about what numbers we get from a student contribution/total course costs calculation, and to look at other rationales for setting student charges.

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* I am using ‘course costs’ a bit loosely here; the calculations are actually student contribution/Commonwealth-supported student funding rate. The funding rate is typically around the actual costs, but this varies between disciplines and institutions.

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